9. Ex.10-28 Budget Variances, Materials and Labor Cinturon Corporation produces
ID: 2464615 • Letter: 9
Question
9. Ex.10-28
Budget Variances, Materials and Labor
Cinturon Corporation produces highquality leather belts. The company's plant in Boise uses a standard costing system and has set the following standards for materials and labor:
eBook
Leather (3 strips @ $4) Direct labor (0.75 hr. @ $12) Total prime cost
$12.00 9.00 $21.00
During the first month of the year, Boise plant produced 92,000 belts. Actual leather purchased was 287,500 strips at $3.60 per strip. There were no beginning or ending inventories of leather. Actual direct labor was 78,200 hours at $12.50 per hour.
Required:
1. Compute the costs of leather and direct labor that should be incurred for the production of 92,000 leather belts.
Cost of materials $ Cost of direct labor $
2. Compute the total budget variances for materials and labor. Total Budget Variance
Materials $ Labor $
3. Conceptual Connection: Would you consider these variances material with a need for investigation?
Explanation / Answer
For output of 92,000 belts, as per standards, material & direct labour should have been used as follows.
Standard Quantity (SQ) = 3 strips x 92,000 = 276,000 strips
Standard Direct labour (SDL) = 0.75 hr x 92,000 = 69,000 hrs.
Answer to question 1:
costs of leather and direct labor that should be incurred for the production of 92,000 leather belts
a) Cost of leather : SQ x Standard Rate(SR) = 276,000 strips x $4 = $1,104,000
b) Cost of direct labour: Std. Cirectlabour Hrs. x SR = 69,000 x $12 = $ 828,000
Total Prime Cost = a+b = $1,932,000
Answer to question No.2: Total budget variances for materials and labor
Material Cost Variance : SQ x SR - AQ x AP = (276000 x 4) - ( 287500 x 3.60)
= $1,104000 - $1,035,000 = $69,000 (Favorable)
Direct Labour Cost Variance = Standard Wages - Actual Wages
= (Std. Hr x SR) - (Actual Hr x AR)
= (69,000 hr x $12.00) - ( 78,200 hr x $12.50)
= $828,000 - 977,500 = $149,500 (Unfavourable)
Answer to question No.3:
Yes. Both teh variances needs to be investigated.
Material: Though matrial per strip actual variance is lesser than SR, but its usage is below standards. Hence mnaterial usage can be investigated.
Direct Labour: Hour usage & rate both are higher than the standard set. Hence both needs to be investigated. .
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